Explain the price ceiling and price flooring ?
Solution:
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- Price ceiling is a maximum price fixed by Government that a seller can charge from the consumers.
- Price ceiling is fixed below the equilibrium level to ensure that the essential commodities are affordable to general public.
- It enables poor people to afford essential commodities at a reasonable price. It creates a problem of shortage as it leads to a situation of excess demand.
- The situation of excess demand creates a problem of Black Marketing which worsen the situation of poor sections of the society as in situation of black marketing, the goods are sold at a price higher than that fixed by the government.
- So, the government should ensure efficiency of ration shops and other channels of distribution along with fixing price ceiling to ensure welfare of poor sections of society.
- Price Flooring: A Floor price is the minimum price at which a commodity can be sold legally.
- Floor price if fixed above the equilibrium price, serves the purpose of welfare of the producers (say farmers).
- When price floor is fixed at P” quantity demanded will contract to OQ” but at this price, suppliers will be ready to supply OQ’. As a result, surplus of QQ” will emerge.
Difference between both the terms:Basis of Difference
Price Ceiling
Price Floor
Meaning
Maximum level of price that a seller can charge.
Minimum level of price that a seller should charge.
Basic Rationale
To protect the welfare of poor and vulnerable people of the society.
To protect the welfare of labourers and farmers by ensuring minimum returns.
Price
Maximum Price is set below the equilibrium price.
Minimum Price is set above the equilibrium price.
Effect
Leads to excess demand.
Leads to excess supply.